Posted by: Josh Lehner | January 18, 2018

3 Places the Labor Will Come From

Given that the labor market will remain tight, and the immense response to the New York Times article recapped yesterday, Bloomberg columnist Conor Sen asked:

This is speculative, but I think there are three sources of potential workers that aren’t really being talking about: people with self-reported disabilities, stay-at-home moms, and young adults.

Let’s start first with people with self-reported disabilities (physical and/or cognitive). Over the past 20-30 years there has been a massive increase in the share of prime working-age adults citing illness or disability as the reason they are not working, or looking for a job. This increase is approximately 3 percentage points of the prime-age population nationwide and 4 percentage points in Oregon. However, as detailed previously, there has not been a corresponding increase in Social Security Disability Insurance, nor a big increase in households reporting disability income. This difference is puzzling.

We previously put forth a few hypotheses to explain the gap, including the possibility of a genuine public health crisis or broader social acceptance of pain. However we also discussed individuals may be trying to save face when answering the question of why they are not working. For example, instead of saying companies would not hire them, they said they had a bad back, otherwise they would work. These can be difficult issues to discuss, particularly with strangers. This hypothesis is one way to help square the differences seen in the data. It can also now be tested as the labor market is tight. Will we see a cyclical decline among this seemingly structural trend?

As luck would have it, economist Ernie Tedeschi was digging into this the other day. (I highly recommend following Ernie on Twitter as he seems to always be conducting fascinating research using microdata.) His latest work shows that individuals who previously cited illness or disability are now flowing back into the labor force in greater numbers. Not a huge increase yet, but some movement in that direction. Furthermore, Ernie also finds that some of those previously citing disability are now switching their responses to other options like school enrollment, or taking care of the kids, etc as the reason for not working. All of this is very interesting and well worth monitoring moving forward. If, somehow, a quarter of the increase in those prime-age Oregonians citing disability returned to the labor force that’s approximately 20,000 potential workers, or around 10 months of job growth. That’s a very big number.

The second group of potential workers are stay-at-home moms. Our office documented the increases seen since 2000 in our previous report. I’m sticking to moms here given that 1 in 5 are not working specifically to stay home and take care of the kids while just 1 in 100 fathers are doing likewise here in Oregon.

As seen in the chart below, labor force participation rates are lower today among Oregon moms with elementary school-age kids or younger. The big unknown, however, is just how much of these trends are economic related, versus societal shifts or simply personal or family preferences. Elementary school students today were all born at the peak of the housing bubble, during the Great Recession or in its immediate aftermath. Job opportunities barely existed for anyone looking, including new moms. It’s possible that todays middle school and high school students were born long enough ago that their moms were able to stay in or enter the labor market under better economic conditions.

High childcare costs, especially in Oregon, and possibly family leave practices may explain the differences seen in mothers of newborns and pre-schoolers. But what about the trends seen among moms of elementary school-age children? This decline of 10-15 percentage points in participation is equal to approximately 20,000 Oregon moms today. Their educational attainment breakdown is 45% high school or less, 22% associate’s or some college, and 34% bachelor’s degree or higher. Clearly, stay-at-home moms are another large pool of potential workers worth watching moving forward.

The third potential source of workers are likely to be young adults — teenagers and college-age kids. As discussed back at Thanksgiving when I begged you to be nice to your nephew, labor force participation rates among this population have fallen around 15 percentage points. However there was a corresponding increase in school enrollment. To the extent that falling participation rates reflect a weak economy where the broken jobs ladder meant there were fewer opportunities for young adults, then we should expect some reversal of these trends in a strong economy. If we do see a reversal, that means it will likely come out of enrollment in higher education.

We’re already seeing this to some degree, however in a strong economy the share of 18-24 year olds enrolled in college likely has more room to decline. Should it return to mid-2000s rates, that’s another 20,000 potential workers as well. Whether or not this would be a good development is an open question. As our office has said previously, the silver lining to fewer young adults working today is that they are learning additional skills in school they can bring to the labor market tomorrow.

Enrollment declines are seen throughout the nation in recent years. Oregon community college enrollments are back to where they were a decade ago. 4 year universities are generally seeing flat to falling enrollments as well. There are a few exceptions, like both Oregon State’s main Corvallis campus and it’s Cascade campus in Bend.

Bottom Line: The labor market will remain tight until the next recession. This is due to the strong economy, which is approaching full employment, but also due to demographics as the Baby Boomer retirements are rising. Likely candidates to boost the labor force include those citing disability as the reason they were not looking for a job, stay-at-home moms, and young adults foregoing higher education. Overall, a tight labor market is pulling more workers back in. We should hope these gains continue as a tight labor market works wonders, even if it does not cure all ills.

Posted by: Josh Lehner | January 17, 2018

Tight Labor Markets Work Wonders (Graph of the Week)

Over the weekend, Ben Casselman’s New York Times article took the economics profession by storm. That may be an understatement too. The reason is that Ben was able to put a face to, and give real examples of how employers are responding to a tight labor market. Specifically, he highlights a Wisconsin company that hires inmates at market wages ($14/hr). The inmates actually get to keep this money too, or it accumulates in an account until they are released. This story comes on the heels of another one late last year that highlighted a company that employs recovering drug addicts as a way to fill out their workforce. The company even holds, or allows for counseling meetings to take place at the work site in an effort to help their workers stay clean, and thus productive workers as well.

Ben’s article also quotes Larry Summers, a Harvard economist and former Treasury secretary, as saying “When the unemployment rate is lower, employers will adapt to people rather than asking people to adapt to them.” As our office has said in recent years, a tight market means businesses much dig deeper into the resume stack to fill positions. They need to pay more to attract and retain workers. And firms are much more likely to hire individuals with an incomplete skill set, or a gap on their resume. On-the-job training becomes considerably more important in a strong economy.

All of this is true, and I think helped set the stage for the popularity of the New York Times piece. It was a nicely researched, and well-written article that was able to put a face to the economic theory and data. Additionally, these are the types of wild anecdotes that only happen in a strong economy. A tight labor market works wonders. Now, it doesn’t cure all ills. Employing a wider swath of the population, including those with less experience, fewer skills or those previously discriminated against is just a start, but it is a start nonetheless. One of the biggest problems in the past 18 years is the fact that the economy has not been at or, quite frankly, even near full employment for the vast majority of that time.

One piece of research Ben uses in his NYT article to prove his point is looking at the share of the population with a job broken down by educational attainment. Across the U.S. in the recent years, employment rates have risen the fastest among those with less formal schooling. The expansion has clearly spread to all groups. The same is true here in Oregon, as seen in this edition of the Graph of the Week. As noted previously, the share of prime-age Oregonians with a job is back to where it was a decade ago. However, and somewhat surprisingly, this is true for essentially all levels of educational attainment. Tight labor markets and a strong economy do wonderful things. There is a reason the Federal Reserve has a dual mandate. It’s not just price stability, but price stability and maximum employment.

Finally, due to the article and the response among the economics profession, Bloomberg columnist Conor Sen asked what the next group to see stronger employment rates would be. Tomorrow, I take a stab at answering him.

Posted by: Josh Lehner | January 11, 2018

Occupations, Wages, and Educational Attainment

Four year degrees are not the be-all and end-all when it comes to career choices and earnings. Inevitably some dropouts will become successful managers, while some graduate degree holders will continue to work food preparation jobs. However, the correlation between education and pay is strong. The surest path toward a high-wage job in today’s economy is a college degree, and in some cases a graduate degree. That said, it is important to point out that certificate programs, apprenticeships and the like also further individuals’ skills. Workers are more competitive in the labor market provided the training or program itself is actually of value to employers (not all of them are, unfortunately).

What’s interesting when it comes to occupations, wages, and educational attainment is the wide range of outcomes within similar groups. First, let’s talk about the occupations that have high levels of formal education, or the right-hand side of the chart below. Within this group there are those, like computer programmers, doctors, engineers, and lawyers, that earn more than double the statewide median wage. Conversely, other highly educated occupations, while certainly paying more than the median wage, do pay less that these counterparts. Among these are Scientists, Teachers, Community Service (counselors, social workers, clergy, etc) and Arts, Design and Entertainment occupations (includes public relations and media). The majority of these jobs do require a bachelor’s degree and may reflect more of a lifestyle occupational choice than a pure salary story, where the workers enjoy additional nonpecuniary rewards in addition to their salary.

However, what I find most interesting, or among the most important items to note with this research, are the differences among the upper middle-wage occupations. All of these jobs pay approximately the same wage because they are performed by skilled workers, yet require vastly different levels of formal education. You can see this a bit clearer in the chart below. Note that this chart shows the same exact information, however it is zoomed in a bit, and I have changed the color scheme for aesthetic reasons — it looks better for presentations when there isn’t a sea of red.

The differences here are that construction workers and installation, maintenance, and repair workers learn largely on the job, while teachers, librarians and social workers learn in the classroom. Within the job polarization research, the reason for this is that these jobs require abstract thinking and problem solving skills. These occupations also perform nonrountine physical activities and require human interaction, making them harder to automate. Construction and installation, maintenance, and repair jobs are the gold standard for wages when it comes to jobs that largely do not require a college degree. This is one reason why an increased focus, or at least maintaining focus on the trades and apprenticeships and the like is important for both individuals, and the economy at large.

In terms of the outlook, these upper middle-wage jobs can largely be thought of population driven. Stronger population growth leads to increased demand for housing, repair work, police officers, social workers, and teachers. During the strong 1990s expansion, population growth averaged nearly 2 percent per year. It was during this period that Oregon was able to stem the polarization tide, given the strong gains in these types of jobs. In recent years, we have seen middle-wage jobs increase again as the economy has turned around and population growth has picked up. That said, many of these occupations have yet to fully recover all of their lost jobs to date. The outlook calls for ongoing gains as the expansion continues.

Finally, for those interested in more details, the last chart shows more granular educational attainment shares for all occupational groups. The chart is sorted not by median wage but by the share of college graduates, from highest to lowest.

This post was an updated and modified excerpt from our office’s original Job Polarization in Oregon report. I pulled this information for two reasons. First, as mentioned the other day, I am updating and working on some new research regarding the trades and blue collar occupations. And second, at times the reasoning behind these issues, and the labor market outcomes are not discussed enough. Consider this an effort to keep these in mind.

Posted by: Josh Lehner | January 8, 2018

The Labor Market Will Remain Tight

The labor market is tight. Difficulty finding (and retaining) workers is the biggest challenge many businesses face today. Whether or not the economy is truly at full employment is largely an academic issue*. In practice, we’re essentially there. This is especially true in Oregon relative to much of the country. However, that also does not mean the labor market cannot get tighter, or it cannot become more challenging to find workers. Furthermore, the tight labor market is expected to remain until the next recession hits and the cycle starts anew. That said, the tight market today is really the result of two different, and independent cycles coming to a head.

The first is the business cycle, which is, err, cyclical. The expansion is in its ninth year, unemployment is flirting with record lows, and we’ve seen the labor force response you would expect. There is no longer a large reserve of potential workers just waiting around for a job. There are some, of course, but the share of the prime working-age population in Oregon that has a job is back to where we were a decade ago. It can go higher still, and we should hope it does. A tight labor market will continue to pull workers back into the economy, and force businesses to dig deeper in the resume stack, as well as increase wages to attract and retain talent. All good things! However, the result is the low hanging fruit of economic slack is gone. The growth moving forward will be slower, and likely more difficult as the economy runs into supply side constraints.

The second cycle impacting the tight labor market is demographics, which are structural. While we’ve known about the demographic imbalances for decades, and our office has built in slower net growth moving forward for quite some time, we’re finally at the point where the crunch is truly happening. Yes, the working-age population in Oregon is continuing to increase. There are more warm bodies available to work, or potentially available to work, however that increase is smaller today due to the uptick in retirements. The large Baby Boomer cohort (now about 54-73 years old) are continuing to age into their classic, or active retirement years. It will be another 15 years or so before the vast majority of Baby Boomers are not longer in the labor force at all. While economic strength ebbs and flows with the business cycle, this demographic crunch will remain throughout the coming decade, possibly two.

In the chart above, I’m using 19 year olds as an example of the intake, or the inflows into the working-age population, to compare it with the outflows of retirements. The labor market is obviously much more complex than this, and adding or losing middle-age workers for different reasons impacts overall economic growth as well. I’m also using 19 year olds because I am doing additional work on the trades, or on classic blue collar occupations and the like. Many of these workers do not attend 4 year universities, as they learn their skills on the job and through apprenticeships. More on that when it’s available, although it will be based on U.S. data due to sample size concerns.

Bottom Line: The labor market is tight and expected to remain so until the next recession. The cyclical issues will come and go, however the demographic crunch is finally upon us and here to stay for the foreseeable future.

* Count me on the “there is still some slack remaining, but it will be increasingly difficult to wring out, but we should still try to get it” side. Or as The Economist’s Ryan Avent likes to say, “try overshooting for once.”

Posted by: Josh Lehner | January 4, 2018

Recreational Marijuana Sales (Graph of the Week)

The big news this morning is that the federal government, led by Attorney General Jeff Sessions is set to rescind the so-called Cole memo, or memos as the case may be. For those who don’t know, the New York Times describes it as “an Obama-era policy of discouraging federal prosecutors from bringing charges of marijuana-related crimes in states that had legalized sales of the drug.” In practice this allowed Colorado and Washington first, followed by Oregon, Alaska, Nevada, and now California to establish recreational marijuana markets and not worry too heavily about federal prosecutors cracking down on these operations which were legal at the state level, but never legal at the federal level.

Last year, our office was tasked with forecasting recreational marijuana tax revenues for the state. You can read our summary here. Included in our work, and discussed with our advisory group was the possibility of changes in federal policy, or direction. This was especially salient given the changes in the executive branch. Our forecast summarizes it as a risk (PDF pg 38):

Finally, the one risk that looms large over the entire forecast is the federal government. While there has been no clear warning or action taken, there is a non-zero chance the federal government could step in and eliminate, or severely restrict recreational marijuana sales. In this event, taxes collected would be considerably less than forecasted.

Well, now there does appear to some action taken. Ultimately it will likely come down to enforcement, and the choices prosecutors make. We will be meeting with our advisory group again this month, and will discuss the implications of these changes, along with other issues and trends in the recreational marijuana market. More on this after our meeting and as we get closer to the Feb 16th forecast.

All of this brings us to this edition of the Graph of the Week, which shows monthly recreational marijuana sales for Colorado, Washington, Oregon and Nevada. These sales figures are estimates based on reported tax collections, and do not include medical marijuana sales. In total across the four states, they are seeing around $250 million in recreational marijuana sales per month. Additionally, all states continue to see growth in this newly legalized world. However the exact level of sales is also determined by the size of the population, usage rates, and tax policy, among other factors.

In fact, in my preferred chart in comparing sales trends, Oregon’s first year and a half of sales are nearly identical to Colorado’s first year and a half of sales, after you control for population size. Let’s call this the Bonus Graph of the Week. Also note that Nevada is seeing strong sales in their first few months. Nevada is currently selling about the same amount of recreational marijuana as Oregon is today, however with a much smaller population. Their initial adjusted sales data is the highest we’ve seen among the legalized states. Nevada and Las Vegas in particular are also a tourism hub, and thus are seeing larger sales than the resident population alone would suggest. I don’t have a huge reason to believe cannabis tourism is a big factor in Oregon’s sales, but I think it clearly is in Nevada.

As we write in our forecasts, there are a lot of risks to the recreational marijuana outlook. In particular, usage rates, prices, harvest levels, regulations and the like both have upside and downside implications for the forecast. However, none of those loom as large as changes in federal policy. Today’s actions may end up mattering substantially, or not so much, but we don’t know the answer yet. Our office will continue to work with our advisors, and to adjust the tax revenue outlook accordingly.

Posted by: Josh Lehner | December 20, 2017

More on Housing Supply, Affordability, and Filtering

Last week’s post, Why Housing Supply Matters, generated quite a bit of interest. I have fielded a number of requests from folks asking for similar types of analysis for their specific region of the state, among other things. What follows below are the filtering charts for three different regions in Oregon for which data is available.

These so-called PUMAs, or Public Use Microdata Areas, are the lowest level of geography available for which one can download the underlying Census data and perform one’s own analysis. The standard, published Census tables can go to a much more granular geographic level of course, however you are limited in what information is available. For example, you could look at median rent or median home value by decade of construction at a more granular level, but you would be unable to look at the rent/home value distribution by decade and how those homes or apartments fit into the overall market.

Additionally, keep in mind that that PUMAs have smaller sample sizes, which can result in larger margin of errors depending upon what one is examining. For example, the first two PUMAs examined today have underlying sample sizes in the 600-700 range. That’s not bad of course. The same is true for the Portland region as well, where there are more than a dozen individual PUMAs. However when we looked at the Portland region as a whole last week, the combined sample was more than 9,000.

First, lets look at the North Central Oregon PUMA, which covers the Columbia Gorge, stretching into Eastern Oregon, and then down into Central Oregon excluding Deschutes County. Overall, this PUMA’s pattern of growth, and filtering looks very similar to the Portland region and Oregon overall. That said, we know this PUMA contains a wide array of cities and regional economies with varying levels of economic performance. Is this chart perfectly applicable in Hood River and in Fossil? No, of course not. Each city, or county for that matter differs given their local conditions. That said, this is as good of a look as we can do for this region of the state given data availability, and, in the big picture, the same general patterns are evident.

Next we turn our attention to the southwestern corner of the state: Coos, Curry, and Josephine counties. These three counties combine comprise another PUMA for which data is available. One difference seen in this part of the state is the relative lack of construction in the 1990s (at least compared to other parts of the state). This is likely part of a hangover from the early 1980s recession when the timber industry restructured. It took Coos County until the mid- to late-1990s to fully regain the total level of employment it had in 1979. So relatively less new construction in an economically hard-hit area seeing slower population gains makes sense. Overall, I think most of the older housing was built on the south coast, while the newer (1990s-today) is mostly going to be Josephine county construction. The least expensive third in the housing market in SW Oregon is rents less than $500 per month or homes less than $170,000.

Finally, it can be helpful to look within a region to see how the housing stock fits together. The chart below shows the SE Portland PUMA (essentially the Brooklyn and Sellwood neighborhoods in Portland out through the Lents neighborhood). You can see the Census map here, but fair warning that it is a giant sized PDF file. I kept the price points for dividing up the stock the same as the overall Portland metro, because the goal is to see how SE Portland fits into the bigger picture. Here a couple of things stand out. First is the large stock of older housing. This makes sense particularly given these are close-in neighborhoods that have existed pretty much since Portland was founded. Second, SE Portland overall is about 5% of the Portland MSA’s total housing stock. However it accounts for 4% of the least expensive third, nearly 6% of the middle third, and 5% of the most expensive third. So the SE Portland PUMA is certainly average to above average in terms of housing costs, but maybe not quite as much as one might think. However, there is considerable variation within the PUMA as well, given prices in Sellwood or Eastmoreland vs Lents. This situation is similar to that of the North Central Oregon PUMA where the geographic area can mask some of the unequal distribution within the region. This goes to highlight one of the limitations of the data.

Anyway, just a bit more food for thought and a few other examples along these lines. Happy holidays everyone.

Posted by: Josh Lehner | December 14, 2017

Why Housing Supply Matters

Last week, I was a panel member for the YIMBY (Yes In My Back Yard) breakout discussion at the Oregon Leadership Summit. The group overall discussed the lack of supply, the importance of affordability, some regulations, market conditions, public policies and the like. It was a wide-ranging and informative session, if I may say so myself. Today I want to recap a few things, and take another stab at visualizing the importance of housing supply and the role of filtering.

First, I discussed a few of the bigger picture things our office has done, including the significance of affordability for Oregon’s long-run economic growth, the fact that affordability truly is a statewide challenge, the main housing supply constraints holding back construction in recent years, and the importance of household income gains for affordability.

Second, the basis for the whole YIMBY panel is some forthcoming research by ECONorthwest, led by Mike Wilkerson. While our office has done some back-of-the-envelope calculations trying to quantify the underbuilding of housing, Mike and ECONorthwest bring a full-fledged model looking not just at Oregon, but across all states. The upshot of the research is Oregon has probably underbuilt housing even more than we think we have. One result of this work is that for the first time the Oregon Business Plan is incorporating a housing supply/new construction goal. In essence, the newly stated goal is for Oregon to build 30,000 new housing units per year. This calculation is based on our office’s forecast for housing starts (~24,000 per year) plus an additional amount of new construction to make-up the lost ground over time.

Third, just as we know affordability is a statewide challenge, we know the lack of new supply is too. Every region in Oregon is adding jobs and new residents, however we continue to see very low levels of construction – not just relative to the bubble, but prior to that even. This is particularly the case once you get outside of the Portland area.

Fourth, as we discussed previously, housing does filter. New construction is always expensive and always aimed at the upper third or so of the market. That said, over time as housing depreciates, it does become more affordable. This filtering does not happen overnight. It is a long-run process. Filtering is also the major way to provide reasonably priced workforce housing for those making in and around the median family income. There is not nearly enough public money to fund the affordability gap, given the demand is too large, and the costs are too high. Now, there is a role for the public sector to play, particularly for the lowest income households. Don’t get me wrong. Every single unit counts. However, the solution has to mostly be a private market solution. And the linchpin to this process is to continuously add new supply. If you build more housing, you get more filtering.

Finally, what follows is another effort to show how filtering works in the real world. What the charts below show is the current housing stock in the Portland metro based on the recently released 2016 American Community Survey data. The first chart shows the housing stock divided into thirds based on home values or monthly rents*. Then we look at when these units were built by decade. Remember, we segmented by price first, then by decade of construction, not the other way around.

From a big picture perspective, you will see that we have some expensive and some more affordable units from each decade, even if the exact breakdown varies based upon the unit type, geographic location, quality of construction and the like. That said, for today I want to focus just on the least expensive third of the current housing market, or the red portion. Basically, these are apartments that rent for less than $890 per month, and homes valued below $290,000.

The biggest takeaway you see is that the total or absolute number of these more affordable units is pretty evenly distributed across the decades. Yes, there are more of these units from the 1970s and 1990s because Portland built more overall during those decades. However, there are also as many relatively affordable units built in the 2000s as there are from the 1980s and 1960s. This, too, is because the Portland region built more housing in the 2000s. If you look back at the chart above, in the 2000s Portland built nearly a third more housing than in the 1980s, and nearly double what was built in the 1960s. Again, if you build more housing, you get more filtering.

All of that said, the really unsatisfactory part of this work is noticing how little the 2010s production has been to date. Yes, of course, we have yet to see the full decade. However, even with a few more decent years like we have seen lately, the 2010s is on pace to build as many units as we did in the 1980s. And that’s in the Portland area. Across the rest of the state we will surely build fewer units.

While the current lack of supply is a problem today, it will also last a generation, if not longer. The wounds of the Great Recession and housing shortage may heal, but they will remain visible. The reason is that the units that are currently filtering from more expensive to less expensive today are those largely built in the 1990s and 2000s. Fast forward to the 2030s and the small number of units built in the 2010s means there are fewer units to go around, and fewer units to filter then. All of this ties back to the ECONorthwest research and the new business plan goal of not only building enough housing today to meet current demand and population growth, but also trying to build more than that to make up for the shortfall.

* To arrive at the overall housing market thirds, I did segment the market further into single family detached, single family attached, and multifamily for both ownership and rentals. I then added these segments together to get the total.

UPDATE: In a follow-up post, we take a similar look at the North Central Oregon region, Southwest Oregon, and SE Portland.

Addendum: In the comments, I was asked if I could show the single family broken out from the multifamily. Here are the charts for each big segment of the market I looked at. Same general story applies, although the exact specifics of which decade is the largest and which has filtered the most is a bit different. The biggest difference would be the 2000s, where we didn’t build as much multifamily, but we did a good amount of single family (it was the housing boom/bubble, after all).

 

Posted by: Josh Lehner | December 8, 2017

Oregon’s Population Outlook

When the latest population estimates for Oregon came out the other week (see our summary here), I promised you an update on our office’s forecast when it was available. Since then, Kanhaiya, the state demographer in our office, has updated the population forecast and we did discuss it a bit with the Legislature at our latest forecast release as well. The upshot of the new outlook is our forecast for Oregon’s population has been raised. We are expecting a larger population and slightly stronger population growth rates over the next decade than we previously assumed.

Now, it can be hard to tell that the outlook is a bit stronger today if you just look at our standard population forecast chart shown above. That’s because the general nature of the outlook remains unchanged. Oregon is growing, and net migration is driving the growth. What has changed relative to our previous outlook is the composition of this growth moving forward. Oregon is expected to be even more reliant upon migration than we previously thought. Births continue to come in lower than expected, and deaths are rising a bit faster than expected. So the overall increase in the population forecast is entirely due to stronger migration trends. Now, again, this general flavor of an outlook has been what our office has expected for quite some time. As the population ages, we will see more deaths, and births have been disappointing for some time. However, in recent years these trends have been a bit more pronounced than expected. Our forecast has been revised accordingly.

In fact the sharper decline in the natural increase (births minus deaths) is now leading our outlook to suggest that by 2029 the number of deaths in Oregon will actually outnumber births. This date has been pulled forward relative to previous forecasts due to the population numbers in recent years and expectations about their future trends.

What this means, is that migration is no longer just one of the primary drivers and the lifeblood of Oregon’s economy — and our office’s long-term outlook — but it is also a risk to the outlook. The reason it is a risk is that migration is an increasing share of our population growth. In a decade it will be the entire source. This growth does wonderful things for our economy on net, in particular it brings in young, skilled, working-age households. There are growing pains too, but overall it is a clear boon for Oregon. However, if this growth, or these expected migrants don’t come to Oregon in the future — for whatever reason, be it a poor economy, lack of affordability or something else — then our office’s long-term outlook will be revised lower. It would mean a smaller and slower growing economy, everything else equal. It would mean fewer sales for businesses, it would mean fewer workers, lower tax revenues and the like. So while migration is overall beneficial and a major driver of our office’s long-term outlook, it is also the likely linchpin. As such, that makes migration a risk to the outlook as well.

Finally, Kanhaiya’s been looking into births a bit more in depth and I want to revisit the issue in the near future. The fact that births are not increasing much has a number of implications and also a number of drivers. There are also a few national studies/reports discussing this issue that I’d like to tie back to the Oreogn data as well.

Posted by: Josh Lehner | December 4, 2017

Supply Side Constraints

Economic growth has firmed and the expansion continues. As the aftermath of the oil bust recedes, there are not many leading indicators today keeping economists up at night. However that does not mean there are not issues to watch. In fact, the challenges the U.S. economy faces will change as we enter into a different phase of the business cycle. Moving forward, the U.S. economy will begin to hit supply side constraints. While some economists, including the Fed, believe we are already at or beyond full employment, the consistent low levels of inflation in recent years are likely evidence that supply constraints are not holding back economic growth yet. Price pressures have yet to build. How exactly the economy adjusts to reaching some of its current limits, and how the newly reconfigured Federal Reserve reacts are key questions. The answers may go a long way toward determining how long the current expansion lasts.

Now, which supply side constraints will bind the hardest can be challenging to identify in advance. What follows is an effort to think through and sort out which constraints are more likely to be challenges sooner than others. Specifically, the lack of credit availability, labor, new technologies (productivity), and production capacity look to be potential issues in the near future. On the other hand, supply constraints like the lack of raw materials or energy, inadequate infrastructure, or deteriorating international trade relations hurting the global supply chain may be less likely to restrain economic growth in the near-term, however they do remain risks worth watching.

Among the more likely candidates, labor, or the supply of workers is the most obvious. While the unemployment rate itself may be lower than the Federal Reserve’s estimate of the natural rate, it is an imperfect measure. The fact that participation rates remain lower today than in the 1990s and 2000s, even with demographic adjustments, suggest some slack remains. More-plentiful job opportunities for better-paying jobs will bring workers back into the labor market. Currently job openings are at all-time highs and wages continue their slow upward movement, albeit it fits and starts. As such, workers are coming back.

Putting another couple percentage points of prime-age Americans back to work is a reasonable, even minimal baseline outlook. This would match what the U.S. experienced in the mid-2000s. Oregon is already at this point today. However, beyond this you begin to run into larger, longer-run trends that may be harder to reverse. In particular, the rise of those out of the labor force due to illness or disability stands out. Reintegrating these individuals into the labor market is a very important challenge, not just from a labor perspective, but also for the public health and societal benefits that would come with it. A tight labor market will aid this cause considerably.

Additionally, when labor is tight, firms must dig a bit deeper into the resume stack to fill positions. Businesses must be willing to hire candidates with an incomplete skill set, or the long-term unemployed, or those with a gap on their resume. Firms may also compete not just on price (wages) but also on nonpecuniary benefits such as flexible working hours and the like. Similarly, for businesses looking to hire, on-the-job training for those with an incomplete skill set becomes more important in a tight labor market. Overall, the U.S. is not lacking for warm bodies to fill positions. The prime working-age population is growing. It is about attracting workers to fill needs and ensuring the workforce has the skills, or is able to obtain the skills needed.

Other supply constraints likely to impact the economy are the low levels of new business formation and weak productivity growth. Economists are well aware of these trends, but lack a consensus on what is causing these issues, let alone identifying solutions to propel future growth.

Furthermore, while overall industrial capacity utilization remains lower due to the energy sector and oil bust, total manufacturing capacity utilization recently hit a new cycle high. Absent business investment in new facilities and technologies, manufacturers may run out of room to grow sooner rather than later. Industries that are bumping up against capacity include motor vehicles and parts, plastics and rubber, aerospace, and fabricated metal. All other industries look to have some room for additional expansion before new production capacity is likely needed. Over the medium- or long-term the economy desperately needs these new investments, however the path from short-term bottlenecks to long-term economic gains may not be smooth.

Lastly, the lack of market information, or lack of confidence more generally can act as a supply side constraint as well. For businesses reaching capacity today, they need to either hold steady, which slows economic growth, or believe strongly enough in future growth that the firm will bear the risk of making long-term investments. Unfortunately, consumer or business surveys are noisy and typically bear little explanatory power in predicting future growth. However, the ongoing expansion is finally resulting in a tighter labor market and the benefits that come with it, like rising household incomes and falling poverty rates. These domestic gains, coupled with a revived international economy should indicate to firms that even though it took nearly a decade following the financial crisis,  the underlying economic demand is there. The U.S. economy is entering into a new phase of the business cycle; one it hasn’t seen in quite some time. Let’s see how firms and policymakers adjust.

Posted by: Josh Lehner | December 1, 2017

Retirements Hit Close to Home

The aging Baby Boomers are placing downward pressure on economic growth in recent years, and over the coming decade, possibly two. As they continue to enter retirement, net growth rates are and will be slower than we have become accustomed to. Take employment for example. For every retirement, a business must hire two workers to see net job growth. The first worker simply replaces the retiree, resulting in no job growth. A year ago, our office explored these issues a bit more in depth. The upshot is there should be enough jobs in the future, but the topline, net job growth numbers mask the generational churn below the surface.

It should also be pointed out that these recent retirees are not just any old workers. They represent workers with a lifetime of experience and institutional knowledge for their industries and firms. Such workers cannot instantaneously be replaced. It creates challenges for businesses to adjust and adapt. However it also creates new opportunities for current and future workers to gain experience and grow into these roles.

While these trends are undoubtedly true across the economy, they hit especially close to home here in the small world of Oregon economics. This fall, we say farewell and happy retirement to both Paul Warner and Tom Potiowsky. Paul may be better known for his role as the Legislative Revenue Officer these past 18 years or so, however prior to that Paul was the State Economist throughout the 1990s. Tom was a professor of economics at Portland State University in the 1980s and 1990s before succeeding Paul as the State Economist for the 2000s. In recent years Tom returned to Portland State where he chaired the Economics Department and launched the Northwest Economic Research Center (NERC). Tom has officially retired from the faculty but will continue working at NERC. Paul’s retirement is official as of today. However both promise to be around to offer us guidance and counseling.

With the simultaneous retirements of Oregon’s two longest serving State Economists, now is as good of time as ever to examine their careers and forecasting records. Our office after all is tasked with forecasting state tax collections. To this end our office has created a few State Economist statistics.

Given Oregon’s unique kicker laws, there is a very tiny window for which our office’s forecasts can hit the sweet spot. That happens when actual tax collections come in right at our forecast or slightly above it and yet below the kicker’s two percent threshold. Over the decades this has occurred just twice, one indication of how hard it is to hit the sweet spot. Paul did hit the sweet spot once, for his very first Close of Session personal income tax forecast ahead of the 1991-93 biennium. It was not for another 20 years that our office produced as accurate of a forecast.

Now, when it comes to forecasting, one major factor in accuracy is the pesky business cycle and the turning points of when the economy heads into or out of recession. Paul, luckily, never experienced a recession under his State Economist watch. Besides being a great economist, this lack of a recession greatly aided his median forecast error over time. Paul’s forecast errors are the lowest of any State Economist in Oregon’s history. That said, Paul’s Earned Kicker Average, or EKA, was high at .700. What this means is that Paul underestimated revenues by more than 2% (the kicker threshold) on 7 of his 10 Close of Session forecasts (5 each for the personal kicker, and the corporate kicker).

Tom on the other hand dealt with a significantly more challenging economy over his tenure and it shows in his State Economist statistics, which take nothing away from the economist and mentor he has proved himself to be. Tom’s first Close of Session forecast was ahead of the 2001-03 biennium, which turned out to be a forecaster’s worst nightmare. Economic growth had slowed, but it was not entirely apparent the economy was in a full blown recession at the time of the May 2001 forecast. The recession is now judged to have begun in March 2001, or right as our office was working on producing that May 2001 forecast. The result of predicting positive, but slower economic and revenue growth when in fact revenues plunged, was a large forecast error. 2001 was also the first time — but unfortunately not the last — that capital gains swung wildly following the dotcom crash. Not to be outdone, the economy soon turned up and on the back of the housing bubble, the 2005-07 biennium yielded the largest personal income tax kicker in Oregon’s history. What Tom’s State Economist statistics show is that forecasting during a volatile economic period results in larger forecast errors. Additionally Tom has a very low EKA – just 3 kickers in 8 opportunities – but when his forecasts did kick, boy did they ever.

Every current member of our office and of the Legislative Revenue Office owe a great deal of the opportunities we have had to Paul and/or Tom. We are forever grateful for their willingness to share their time, insights and expertise. Our office and the entire State of Oregon’s analytical functions are better off for their years of service. Their daily presence in the office will be missed personally and professionally. May Paul and Tom enjoy their retirements and come back now and again to help us sort out the mess they made continue in their footsteps.

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